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Implied Term of Good Faith in Long-Term Contracts


A recent case has suggested a willingness on the part of the courts to imply a duty of good faith and fair dealing into long-term contractual arrangements.

In Yam Seng PTE Limited v International Trade Corporation Limited [2013] EWHC 111(QB) it was held that there had been an implied term in the distribution agreement between the Claimant (Yam Seng) and the Defendant (International Trade) that the parties would act in good faith and that International Trade had breached such term by both providing misleading information to Yam Seng and threatening not to honour certain rights under the contract.

The Court held that the test of good faith is objective and depends upon whether the conduct in question would be regarded as commercially unacceptable in the particular context by reasonable and honest people; good faith is therefore defined by both the contract and the standards of conduct with which, objectively, the parties would have reasonably assumed compliance was required (without the need to openly state such standards in the contract).

This decision emphasises that parties to a long-term contract cannot necessarily rely on the express terms of the contract as a defence against an allegation that they acted in bad faith.  Moreover, if the contract is of a long-term nature, it is very likely that the parties will be subject to a duty of good faith.

While the list is not exhaustive, in order to avoid the risk of an allegation of bad faith, parties to a contract should always seek to act in a way that is loyal, reliable and honest, to deal with requests for information promptly and accurately and to ensure that all information relevant to the contract that they are aware of is communicated promptly to the other party.

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